U.S. Stocks Sink As Housing Woes Persist

NEW YORK (MarketWatch) -- U.S. stock indexes dropped about 2% Monday, retreating after three straight sessions of mostly gains, with concerns about the financial sector continuing to weigh on sentiment and housing data failing to appease investors' unease.

"Financial stresses are still permeating global financial systems, despite massive accommodation from the Fed," said analysts at Action Economics.

Down for the first in four sessions, the Dow Jones Industrial Average was recently down 237.66 points, or 2%, to 11,390.40.

All of the Dow's 30 components posted declines, led by insurance giant American International Group Inc. , down 5.1% after Credit Suisse analysts lowered their third-quarter profit estimate and target price on the insurance giant.

The S&P 500 Index was off 24.32 points, or 1.9%, to stand at 1,267.88, with all of the index's 10 industry groups tallying losses -- which in the late afternoon were fronted by consumer discretionary, down 2.6%, followed by financials, which shed 2.4%, and industrials, off 2.1%.

Among the hardest hit, shares of Coach Inc. were off 6.9%.

Capital demands

Shares of Freddie Mac jumped 17.4% as solid demand for a $2 billion debt auction showed the troubled mortgage entity is still able to raise capital, even if the markets demand higher yields. .

Shares of Freddie counterpart Fannie Mae were up 11%.

Outside the financial sector, shares of Cablevision Systems Corp. were off 4.6% after Citigroup Inc. cut its rating on the Bethpage, N.Y.-based cable operator to sell from buy. .

The Nasdaq Composite Index declined 48.75 points, or 2%, to 2,365.96.

Trade was particularly light, even for the end of summer, making it likely that any moves were more exaggerated than normal. On the New York Stock Exchange, volume topped 605 million, and declining issues overtook those advancing 4 to 1. On the Nasdaq, 453 million shares exchanged hands, and advancers topped decliners more than 3 to 1.

Down from the session's start, stock indexes retained their losses after the National Association of Realtors reported existing-home sales rose in July, but inventories also increased, hitting record levels.

"An increase in foreclosures boosted existing-home sales but depressed home prices. The rise in inventory is particularly worrisome," wrote Lehman Brothers analysts Michelle Meyers and Zach Pandl in an afternoon note.

Treasury prices advanced, pushing 10-year yields to three-month lows, in the wake of the data suggesting the nation remains mired in a housing slowdown.

On the New York Mercantile Exchange, crude futures closed at $115.11 a barrel, up 52 cents. .

Elsewhere on the Nymex, gold futures also fell, with the contract for December delivery declining $7.80 to close at $825.70 an ounce. .

Weakening oil prices helped the dollar erase earlier losses against most major counterparts, with the dollar index , which tracks the greenback against a trade-weighted basket of currencies, recently standing at 76.83, up from 76.813 in late North American trading on Friday. .

In corporate developments, Canadian energy-services provider Precision Drilling Trust plans to buy Grey Wolf Inc. for an estimated $1.12 billion in cash and 42 million shares of its stock. .

But investors offered a less-than-enthusiastic response, with shares off both companies sliding.

Overseas, stocks in Europe drifted lower in thin trade, paced by a decline in banking shares. .

Elsewhere, Hong Kong and Tokyo stocks staged a strong recovery as investors snapped up financial shares. .

On Friday, stocks rallied, with the Dow striking its largest one-day gain in two weeks, after oil fell more than $6 a barrel, its greatest percentage decline in more than four years.

By Kate Gibson